China won’t sell dollars to buy gold

DUBAI Commodity Online: China is on a gold buying spree these days to ensure that the country overtakes the United States in gold reserves.

China, which is “underweight” on gold holdings, will increase buying as the economy expands, said Jeffrey Rhodes, chief executive officer of INTL Commodities DMCC. China’s 1,054 tons of gold represents less than two percent of its reserves, Dubai-based Rhodes said in an interview today. That compares with the international average of 10.2 percent held by central banks worldwide which have under 30,000 tons of the metal, equivalent to about $960 billion.

“Clearly China, as a percentage of holdings in gold, is underweight,” Rhodes said. “You’d definitely expect China to be accumulating gold in its reserves in the coming years. So the percentage is likely to grow. Obviously it should have a significant impact on demand,” he said.

China’s economy expanded 8.9 percent in the third quarter, the fastest pace in a year, as stimulus spending and record lending growth helped the nation lead the world out of recession. The country, the world’s biggest gold producer, has increased reserves by 76 percent since 2003 and has the world’s fifth- biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

Record government debt and low interest rates have pushed gold to records as investors sought a shelter from the prospect of rising inflation and currency debasement. Gold for immediate delivery, which touched a record $1,070.80 an ounce on Oct. 14, traded at $1,058.27 as of 4:02 p.m. in Singapore.

Rhodes said he didn’t expect China to sell US debt to buy gold as rising wealth allows it to accumulate the metal and any sale erodes the value of their assets held in the currency of the world’s largest economy. “I don’t think they will sell dollars to buy gold,” he said.

“As growth and wealth accumulate in the coming years, some of the accumulation will be diverted into an increase in gold reserves.” To help boost gold holdings, China may resort to domestic production, he said. “They could buy internationally but the quick fix is to absorb some of the domestic production into their reserves.”